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Health Care Reform: Fees Payable by Group Health Plans for Comparative Effectiveness Research

May 1, 2012
Employee Benefits Alert

The IRS recently proposed regulations to address the fees imposed on health insurers and certain self-funded group health plan sponsors under the Affordable Care Act (ACA). Assuming these fees survive the Supreme Court’s ruling on the ACA, they will be payable for plan years ending on or after October 1, 2012 and health insurers and plan sponsors will need to plan for them.

What is the purpose of these fees?

The ACA created both a Patient-Centered Outcomes Research Institute (Institute) and a Patient-Centered Outcomes Research Trust Fund (Trust) to pay for it. The purpose of the Institute is, through research, to improve the quality and lower the cost of health care by “advancing the quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings.” The Trust is intended to fund the work of the Institute.

How much are the fees?

The fees will be imposed over a seven-year period – beginning with Plan Years ending on or after October 1, 2012 through Plan Years ending before October 1, 2019. For the first Plan Year (i.e., a Plan Year ending between October 1, 2012 and October 1, 2013), the fee will be $1 times the number of covered lives. For the second Plan Year (i.e., a Plan Year ending between October 1, 2013 and October 1, 2014), the fee will be $2 times the number of covered lives. For Plan Years three through seven, the fee will increase in an amount equal to the increase in the projected per capita amount of the National Health Expenditures most recently released by the U.S. Department of Health and Human Services before each October 1. To determine how to calculate the number of covered lives, see below.

Who is to pay the fees?

  • Health insurers are to pay the fees on both group and individual health policies.
  • For self-funded group health plans, the fee will be paid by the plan sponsor. Where the plan covers more than one employer in the same controlled group, if the plan document specifies a single plan sponsor, then that employer will file and pay the fee. If the plan document does not designate a specific plan sponsor, then each employer in the controlled group that has adopted the plan will file and pay the fee for its own employees, though this latter situation can be avoided simply by amending the plan document to designate a single plan sponsor before the fees are due.
  • For association plans, multiemployer Taft-Hartley plans, multiple employer welfare arrangements (MEWAs) or VEBAs, the plan sponsor is the association, committee, Board of Trustees or other similar organization that establishes or maintains the plan.
  • Where a plan provides for both insured and self-funded benefits, the fee with respect to the insured benefits will be paid by the insurer and the fee with respect to the self-funded benefits will be paid by the plan sponsor. In this situation, duplicative fees may well be paid with respect to a single covered individual.
  • Where a single employer sponsors more than one self-funded plan, it can treat all plans as a single plan if they all have the same Plan Year. This will avoid paying a duplicate fee for the same covered individual.

What health plans are and are not subject to this fee?

The following plans and coverages are subject to this fee:

  • Medical benefit plans,
  • Prescription drug plans,
  • Dental and/or vision plans if provided as part of a unified health care plan without a separate election or a separate employee contribution, i.e., they are not “excepted” benefits under HIPAA, see below,
  • HRAs,
  • FSAs that are not “excepted” benefits under HIPAA, see below, 
  • Retiree only medical plans, and 
  • Government plans providing benefits of the kind listed above.

The following plans and coverages are not subject to this fee:

  • Limited scope dental and vision benefits that are “excepted benefits” under HIPAA. Dental and vision benefits will likely be “excepted” benefits if provided under a separate insured plan, or if provided under a self-funded plan with other health care benefits, are subject to (i) a separate coverage election, and (ii) separate employee contributions for those specific benefits.
  • Expatriate coverage for employees working outside the United States.
  • Health Savings Accounts (but the fees do apply to the high deductible plans (HDHPs) that are essential to the tax benefits available with an HSA).
  • FSAs that are “excepted” benefits under HIPAA. FSAs are generally an “excepted” benefit if (i) employees eligible for the FSA are also eligible for medical benefits from the same employer, (ii) the FSA is funded solely through employee salary reductions, or (iii) if there is an employer contribution, the employer’s contribution does not exceed the greater of (a) $500 or (b) twice the employee’s salary reduction amount.
  • Stop loss coverage.
  • Employee assistance, disease management and wellness programs that do not provide significant benefits in the nature of direct medical care or treatment.

How are the number of covered lives to be calculated?

Self-funded employers have three methods and two special rules for calculating the number of covered lives to which the fee applies:

  • Actual Count Method - Count the actual number of covered individuals on each day of the Plan Year and divide by 365 or 366, as applicable.
  • Snapshot Method - Count the actual number of covered individuals on at least one day in each quarter and divide by four (or the number of sample days).  A variation on this method is to (i) count the actual number of employees enrolled in single coverage, (ii) add to that the number of employees enrolled in coverage that includes at least one family member in addition to the employee multiplied by 2.35, and then (iii) divide this total by four (or the number of sample days).
  • Form 5500 Method - If the plan offers family coverage, add the number of participants reported on Form 5500 at the beginning of the Plan Year and at the end of the Plan Year. Since Form 5500 does not consider family members, this total serves as a proxy for the total number of covered lives. Of course, if the plan only offers single coverage, then the plan sponsor must divide this total by two to find the average number of covered individuals during the Plan Year.
  • Special Rule for First Year - For a Plan Year that begins before July 11, 2012 (i.e., 90 days after these proposed regulations became available on April 12, 2012) and ends on or after October 1, 2012, the plan sponsor can use any reasonable method for determining covered lives.
  • Special Rule for FSAs and HRAs - For FSAs that are subject to the fee and HRAs, enrollment is always treated as single coverage, so it is only necessary to count the number of employees who have such accounts.

Insurers, of course cannot use the Form 5500 Method, but they can use one of two alternative methods instead – (i) basing their numbers on those reported on the National Association of Insurance Commissioners Supplemental Health Care Exhibit, or (ii) if not required to use the Exhibit, using the numbers reported on a comparable form filed with the Insurance Commissioner of the state in which the insurer is domiciled.

How and when are the fees to be paid?

These fees are due on July 31 of the year following the Plan Year for which they were assessed -- i.e., the July 31 following the calendar year in which the Plan Year ended. Thus, the fees for plans whose Plan Year ends on or after October 1, 2012, and on or before December 31, 2012 (this includes calendar year plans), are due July 31, 2013. The fees are to be submitted using IRS Form 720, which may be submitted electronically.

Action steps

While we will not know the fate of these fees until the Supreme Court issues its opinion on the various issues arising under the ACA, likely sometime in late June, sponsors of self-funded or partially self-funded health care plans should start budgeting now for payment of these fees. It is always better to budget for an item that in the end you do not have to pay, than be faced with an item you did not expect to have to pay, only to learn at the last minute that you do have to pay it.

If you have any questions about these fees, how they apply to the way in which your health care benefits program is designed, any other aspect of health care reform or any other employee benefit issues, please contact one of the Honigman attorneys.